A recent Wall Street Journal article epitomizes the new “conventional wisdom” that asset allocation failed in 2008.
It is true that correlations among major asset classes have increased in recent years giving the impression that asset allocation no longer works.
During the 2008 financial crisis all major equity asset classes experienced severe declines. Even commodities, which historically had exhibited low correlations to equities, dropped dramatically. [click to continue…]
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This question has been coming up a lot lately in the media and some academic journals. Thinking Modern Portfolio Theory died last year is based on the misconception that Modern Portfolio Theory will guarantee against a loss.
That is simply not the case. What MPT believes is diversification to a portfolio, which over the long term can potentially reduce a portfolio’s volatility versus a single asset portfolio.
According to a recent article in Investment News:
Remember, when investing in a diversified portfolio, you will experience negative returns periodically.
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Investors are driven by the fear of losing and losing out.
Last winter, as the financial markets were seemingly in a free fall, panic and fear reigned. There was a sense that the worldwide financial system could collapse and that the problem was bigger than the government’s ability to solve it. This fear of losing spurred more selling and it became a vicious cycle – until it stopped.
Today, it’s a completely different picture. [click to continue…]
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How will we know when the market hits rock bottom and starts a new secular bull market?
This is one of those questions where if we knew the exact answer we could probably make a fortune. Unfortunately, no one cannot pinpoint the bottom of a bear market in real time, but according to money manager John Hussman, there’s an anecdotal measure that might help us narrow the timeframe. [click to continue…]
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According to a recent article in CNN Money, only if you attempt to sort out the handful of winners from the rest of the market.
As the article points out, the majority of individual securities tend to post negative returns over the long run.
In fact, research by Dimensional Fund Advisors found that from 1980 to 2008, the top-performing 25% of stocks were responsible for all the gains in the broad market, as represented by the University of Chicago’s CRSP total equity market database. [click to continue…]
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This week marks the two-year anniversary of the financial meltdown. What lessons have we learned?
On June 12, 2007, news broke that a 10-month old Bear Stearns hedge fund that speculated in mortgage-backed securities was melting down. The fund used leverage and bet heavily on bonds tied to subprime mortgages.
As the market for subprime mortgages began to implode in early 2007, so did the Bear Stearns fund.
This was the first major piece of information that all was not well in the land of finance, and, of course, you know what happened over the next two years. [click to continue…]
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Sunk costs and mental accounting can be hazardous to your wealth.
Imagine you just arrived at a theater and as you reach into your pocket to pull out the $10 ticket you purchased in advance, you discover that it’s missing. Would you fork over another $10 to see the movie?
Compare that to a second scenario in which you did not buy the ticket in advance, but when you arrive at the theater, you discover you lost a $10 bill. Would you still buy a movie ticket? [click to continue…]
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“Wall Street never changes, the pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes.” –Jesse Livermore
Jesse Livermore is a famous early 20th century trader and speculator who was immortalized in the 1923 book, Reminiscences of a Stock Operator by Edwin Lefevre.
Many consider Livermore one of the greatest traders and speculators who ever lived.
Now, we’re not mentioning Livermore because we think aggressively trading and speculating in your account is the way to go. Instead, we want to highlight the above quote from Livermore and discuss its relevance to today. [click to continue…]
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In a battle of the sexes, finance professors Brad Barber and Terrance Odean crunched the trading data on over 35,000 households from a large discount brokerage firm.
They built upon psychological research, which indicates that in the area of finance, men tend to be more overconfident than women. Additional research shows that overconfident investors tend to trade more often than less confident investors.
Armed with this data, Barber and Odean went to work. [click to continue…]
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Would you agree that the stock market has been volatile in the last six months?
As you may have guessed, that’s a bit of a trick question. Most people would say that, yes, the stock market has been very volatile since early November 2008. [click to continue…]
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